To reduce its tax burden, Google expands use of the “Double Irish”

New report: Google moved almost $12B through Bermuda shell company.

Google is moving even more money through a shell corporation in Bermuda—reaching a total of €8.8 billion ($11.91 billion) in 2012, 25 percent more than it did in 2011. By employing a legal yet ethically questionable practice, Google is saving itself billions in taxes worldwide.

The new figures were first reported by the Financial Times on Friday, citing “[recent] filings by one of Google’s Dutch subsidiaries.” This widespread strategy of moving money around involves two specific tactics known as the “Dutch Sandwich” and the “Double Irish.” (Ars obtained a copy of this filing, dated September 27, 2013, from an anonymous source.)

As the Times concluded, these disclosures mean “that royalty payments made to Bermuda—where the company holds its non-US intellectual property—have doubled over the past three years. This increase reflects the rapid growth of Google’s global business.”

Bermuda triangle of taxation

As Ars has reported before, here’s how the Double Irish works. Bloomberg first described the process in 2010: a company sells or licenses its foreign rights to intellectual property developed in the United States to a subsidiary in a country with lower tax rates. The result? Foreign profits that come from that tech—like the rights to Google’s search and advertising technology, effectively the keys to the kingdom—are now attributed to that offshore subsidiary rather than the Mountain View, California headquarters. The subsidiaries have to pay “arm’s length” prices for those rights, just like an outside company would.

Bloomberg concluded, “Because the payments contribute to taxable income, the parent company has an incentive to set them as low as possible. Cutting the foreign subsidiary’s expenses effectively shifts profits overseas.”

So who does Google license its tech to? A fun little company called Google Ireland Holdings, headquartered in Bermuda. Bermuda, of course, has zero corporate income tax. So as a Bermuda company, Google Ireland Holdings pays none.

Google Ireland Holdings, in turn, owns Google Ireland Limited, which employs 2,000 people in downtown Dublin. Google Ireland Limited reported a pretax income of less than one percent of sales in 2008 and paid $5.4 billion in royalties to Google Ireland Holdings. (French investigative news site OWNI.fr published Google Ireland Limited’s 2011 annual report and its Irish Registration Office documents in 2012.)

This holding company based in Bermuda is owned by yet another Bermuda-based subsidiary, Google Bermuda Unlimited. It is managed by Conyers, Dill, and Pearman, a law firm specializing in such offshore transactions. That “unlimited” corporation means it is not required to disclose income statements, balance sheets, and other financial information.

But getting money, tax-free, from Ireland to Bermuda requires a stopover in the Netherlands (the "Dutch Sandwich" part) at Google Netherlands Holdings B.V. This entity, according to Bloomberg, “pays out about 99.8 percent of what it collects to the Bermuda entity, company filings show. The Amsterdam-based subsidiary lists no employees.”

Over the last year, various European countries, including the United Kingdom, the Netherlands, and France have been reviewing their laws that enable this type of corporate behavior.

Cyrus Farivar
Cyrus is the Senior Business Editor at Ars Technica, and is also a radio producer and author. His latest book, Habeas Data, about the legal cases over the last 50 years that have had an outsized impact on surveillance and privacy law in America, is due out in May 2018 from Melville House. Emailcyrus.farivar@arstechnica.com//Twitter@cfarivar

All the hand-wringing and preaching and moral outrage in the world won't stop one simple fact- people respond to incentives. The current tax system incentivizes exactly this kind of behavior and this is exactly what it gets. A system with obvious exploits that relies on people being so ethical they would never use them, even when pressured to by shareholders and so on, is simply stupid.

Don't waste any more time debating the ethics of this and just fix the tax code.

Google aren't even the worst. GE use a group relief scheme to pay around €220,000 of tax on around €900 million of profit in 2006, once again through Ireland's lax corporate tax and group relief schemes. My government takes virtually no benefit from this either as we get absolutely NOWHERE near the paltry 12.5% tax we charge. Their tax is equivalent to this - paying €10 on a €30,000 salary.

To people who defend these practices saying "It's the law. Blame the law, not Google." It's the law because huge corporations like Google lobby to make (and keep it) the law.

Ultimately, you're both right and too simplistic.

You're right because lobbying definitely affects our tax code.

You're too simplistic because it's within the capabilities of almost any Fortune 100 to pick up its HQ and drop it somewhere with more corp friendly tax laws and we wouldn't be having this discussion at all. If they don't want to move, then they can reverse the relationship between on and off shore by selling out to a foreign firm.

The US has high corporate tax rates and, unlike many other countries and the way we tax our companies for international revenue is almost or entirely unique. There is already a ton of incentive for US companies that do global business to pick up and leave. Don't add to it.

All the hand-wringing and preaching and moral outrage in the world won't stop one simple fact- people respond to incentives. The current tax system incentivizes exactly this kind of behavior and this is exactly what it gets. A system with obvious exploits that relies on people being so ethical they would never use them, even when pressured to by shareholders and so on, is simply stupid.

Don't waste any more time debating the ethics of this and just fix the tax code.

That's a great idea and all, but it's impossible to fix the tax code when billion dollar corporations have lobbying power that far eclipses any number of internet petitions you might wish to sign.

To people who defend these practices saying "It's the law. Blame the law, not Google." It's the law because huge corporations like Google lobby to make (and keep it) the law.

Lobbyists don't make laws. Lobbyists convince lawmakers to make laws. We can blame our lawmakers, but after we keep electing the same ones, perhaps we should start blaming ourselves.

You've got to be kidding. So many laws have been written, word-for-word, by lobbyists it is beyond ridiculous. Most regulations are actually crafted by the people being regulated by the law, eg., Wall Street. How else could they come out smelling like a rose every time? You are correct, however, that we the people are to blame for letting it get this bad.

So, these subsidiaries in Bermuda have all this money. What good does that do Google? Wouldn't it incur taxes the moment it tries to transfer any of those profits back to the US or EU? What do Google (and other corps) do with that money? I guess if they have expenses anywhere in the world, they can have that company pay for those expenses?

But, how do the profits get back to the main Google execs and stockholders in the US?

To people who defend these practices saying "It's the law. Blame the law, not Google." It's the law because huge corporations like Google lobby to make (and keep it) the law.

In the case of international tax law though it's pretty difficult to manage. Ireland has no interest in changing their tax structure, because they know what they collect from Google will go from a little to none. The US can't really do much to change Irish tax law and rewriting international tax treaties to just fix this one problem is a mammoth task that will change how international transactions work for a long time. It's one of those abuses that's difficult to manage.

The most impressive thing I've seen the US do is stand it's ground. Tax rates haven't dropped significantly for businesses in the US despite the massive amount of whining that happens from large corporations. Plus they haven't allowed foreign funds to flow freely back into the US without being taxed to death (as unhappy as that makes Tim Cook). Not much has improved, mind you, but at least it's not getting worse.

Profit shifting between cooperating entities is extremely hard to prevent.

Realistically, who is going to decide the fair value of Google's IP to its subsidiaries?

This isn't just the big guys. My former employer of 100 workers split between two countries did the exact same thing. One entity charged the other obscene amounts of money for "consulting" if needed be (never mind actual intellectual property licenses). Often, the goal was just to move money around to where it was needed (big client in one country, work being done, and wages being paid in the other). But obviously any profit was also realized in the country with the least tax burden. Which government was going to step in and say "humm, you're charging that subsidiary too much for software development, they can barely make a profit"?

We don't have to get any other country to change their tax laws. We can change our own to disallow this kind of behavior.

To those saying that Google, Apple, etc. will just relocate their corporate headquarters. That's not going to happen. I mean, they might try to technically change the HQ of the company legally, but it's pretty easy to outlaw that kind of behavior as well.

Also the idea that the US has much higher corporate tax rates than other countries; we may have a large nominal corporate tax rate but no large corporation pays that rate. It's a myth. There's many, many credits and loop holes (like the one this thread is about.)

To people who defend these practices saying "It's the law. Blame the law, not Google." It's the law because huge corporations like Google lobby to make (and keep it) the law.

In the case of international tax law though it's pretty difficult to manage. Ireland has no interest in changing their tax structure, because they know what they collect from Google will go from a little to none. The US can't really do much to change Irish tax law and rewriting international tax treaties to just fix this one problem is a mammoth task that will change how international transactions work for a long time. It's one of those abuses that's difficult to manage.

The most impressive thing I've seen the US do is stand it's ground. Tax rates haven't dropped significantly for businesses in the US despite the massive amount of whining that happens from large corporations. Plus they haven't allowed foreign funds to flow freely back into the US without being taxed to death (as unhappy as that makes Tim Cook). Not much has improved, mind you, but at least it's not getting worse.

Nonsense, while the tax rate may look high, the tax code has become so riddled with loopholes that no corporation pays anywhere near the 35% rate. That 35% is just window dressing.

I'm actually somewhat sympathetic to the argument to abolish all corporate taxes. After all, a corporation exists to generate profit to (at least theoretically) disburse to their investors/owners in the form of dividends. Tax the dividend income on the people ultimately getting that profit. Shouldn't it, mathematically, come out to the same amount of tax revenue, in the end? If you tax pre-dividend corp. profits, then there's less money to pay out as dividends. So, you can tax the money twice, or tax the money once - and it seems like it should be quite possible, mathematically, to ensure you get the same amount of tax revenue either way - just tax the dividends at a slightly higher rate?

Now, you say, well, some of corporate revenue is paid out to employees, vendors, utilities, landlords, etc. Well, all that money can likewise be taxed as income tax when REAL PEOPLE get payed the money.

So, these subsidiaries in Bermuda have all this money. What good does that do Google? Wouldn't it incur taxes the moment it tries to transfer any of those profits back to the US or EU? What do Google (and other corps) do with that money? I guess if they have expenses anywhere in the world, they can have that company pay for those expenses?

Right now, they can use it as "collateral" to get loans in the countries money needs to go to.Which bank is going to deny Google a billion dollar loan, when they have many billions stashed away in Bermuda? It's cheaper to pay low interest on that billion than to bring that money "home" (as if money - and worldwide mega corps - had a home).

But, how do the profits get back to the main Google execs and stockholders in the US?

Investors will be happy as long as they are making money.The difference between getting paying in dividends and increasing corporate valuation matters very little to them. And with billions getting stacked in Bermuda, corporate valuation rises.

Also, how is it that the income to a *wholly owned subsidiary* isn't accounted for as income on the parent company's balance sheet. If A owns B, and B has X dollars in the bank, don't all those dollars belong to A, ultimately. How can Google in the US avoid paying taxes on the profits of its offshore subsidiaries when it's really JUST GOOGLE?

I'm actually somewhat sympathetic to the argument to abolish all corporate taxes. After all, a corporation exists to generate profit to (at least theoretically) disburse to their investors/owners in the form of dividends. Tax the dividend income on the people ultimately getting that profit. Shouldn't it, mathematically, come out to the same amount of tax revenue, in the end? If you tax pre-dividend corp. profits, then there's less money to pay out as dividends. So, you can tax the money twice, or tax the money once - and it seems like it should be quite possible, mathematically, to ensure you get the same amount of tax revenue either way - just tax the dividends at a slightly higher rate?

Now, you say, well, some of corporate revenue is paid out to employees, vendors, utilities, landlords, etc. Well, all that money can likewise be taxed as income tax when REAL PEOPLE get payed the money.

I theoretically agree with you, but you would have to punish any use of corporate funds for personal use at a level just under cruel and unusual. If corporate governance reigned in CEOs better it might work.

I'm actually somewhat sympathetic to the argument to abolish all corporate taxes. After all, a corporation exists to generate profit to (at least theoretically) disburse to their investors/owners in the form of dividends. Tax the dividend income on the people ultimately getting that profit. Shouldn't it, mathematically, come out to the same amount of tax revenue, in the end? If you tax pre-dividend corp. profits, then there's less money to pay out as dividends. So, you can tax the money twice, or tax the money once - and it seems like it should be quite possible, mathematically, to ensure you get the same amount of tax revenue either way - just tax the dividends at a slightly higher rate?

Now, you say, well, some of corporate revenue is paid out to employees, vendors, utilities, landlords, etc. Well, all that money can likewise be taxed as income tax when REAL PEOPLE get payed the money.

Sort of but not quite. Taxes applied at different parts of the economic cycle (like income taxes, sales taxes, taxes charged to business profits, etc) all have different levels of effectiveness. For instance, say a product has a pre-sale tax burden of 30% (provision for taxes on profit, taxes on input materials, import levies) plus a post sale tax burden of 10% (state or provincial sales tax), for a total of 40%. People pay that 40% (fairly) happily and quietly because they are only consciously aware of the 10% sales tax most of the time. However, if you take all of the input taxes out of the equation (the 30%) and add it to the sales portion (making it 40%), even though the final price stays the same, people are far less willing to make purchases because of the obvious psychological implications of being presented with that high tax burden in such stark terms.

So, the system that has evolved collects taxes at various points in the process in order to maximize tax intake while minimizing the negative associations of taxation. Trying to take in all of that money from just one point in the process, or replacing one step like corporate profit taxation with a direct tax on the end consumer, even though it make be the same amount in real dollar terms, is unfeasible.

You've got to be kidding. So many laws have been written, word-for-word, by lobbyists it is beyond ridiculous. Most regulations are actually crafted by the people being regulated by the law, eg., Wall Street. How else could they come out smelling like a rose every time? You are correct, however, that we the people are to blame for letting it get this bad.

Not sure how you can exclaim that I must be kidding when you end by saying that I am actually correct. Lobbyists can write whatever provisions they want, those won't be put into bills and signed into law without our Congresspeople introducing them and voting the bills into laws. And we can keep hating Congress all we want, but it won't make a difference when we always think it's never our specific Congressperson's fault, just everyone else's.

Also, how is it that the income to a *wholly owned subsidiary* isn't accounted for as income on the parent company's balance sheet. If A owns B, and B has X dollars in the bank, don't all those dollars belong to A, ultimately. How can Google in the US avoid paying taxes on the profits of its offshore subsidiaries when it's really JUST GOOGLE?

Because if that were true, you'd double tax every subsidiary: in the country of the subsidiaries HQ and in the US.

It's just that in Bermuda there is no corporate tax. But many countries in Europe have corporate tax to the north of 30%, so you'd be taxing them subsidiaries 55% and more.

That's fine, you may think. But just like Bermuda likes to be the home of many a shell corporations, the US likes to headquarter many a multinational conglomerates. Can't now complain about it.

All the hand-wringing and preaching and moral outrage in the world won't stop one simple fact- people respond to incentives. The current tax system incentivizes exactly this kind of behavior and this is exactly what it gets. A system with obvious exploits that relies on people being so ethical they would never use them, even when pressured to by shareholders and so on, is simply stupid.

Don't waste any more time debating the ethics of this and just fix the tax code.

Why? These types of workarounds usually wind up in someone getting screwed (be it taxpayers, US government, foreign government) so I think it's descriptively appropriate.

And, what can the US government really do about it? They could change the tax code to be more business friendly and thus instead of getting zero, at least get SOMETHING by taking the scheme with the lowest effective rates, drop the corporate rates to that level get the companies to pay something this way.

Even if the actual rate winds up being 6%, 6% of billions is better than 35% of zero.

I'd bet dollars to donuts that most of the people who are posting against this practice would the same exact thing if they were in Google's position. If someone is able to limit the taxes they pay, they typically do so, following the letter of the law.